“Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.”Archimedes

One of the biggest missed opportunities is families doing estate, financial, and retirement planning together and leveraging their strengths while shoring up weaknesses. It used to be commonplace that parents would work with their children in planning to pass on their wealth mainly because it was usually the family farm or family business that was the main asset being transferred. Sometime after the Great Depression, which also came with more industrialization, families stopped planning together and individuals and couples were now on their own.

The SECURE Act brought many negative effects to tax laws, particularly with inherited income taxes. (For my previous blog on the SECURE Act, please go to https://livingtrustlawfirm.com/post-secure-act-generational-planning/). Fortunately, a byproduct of this awful legislation is that some families are once again looking to leverage their strengths by planning together. The potential benefits are truly impressive.

Here are the three areas where leveraged generational planning can make an exponential impact on a family’s finances over decades.

*Gifts. I often have clients who broach the subject of annual gifts to their children and what the tax implications are. Since there is no state-level gift tax in North Carolina, we only have to look at the federal gift tax, and each person can give up to $15,000 per year to as many recipients as they want. (Spouses can give an unlimited amount to each other without any gift tax implications). So a married couple with two adult children would give $60,000 per year, meaning each parent gives each child $15,000. This can double to $120,000 if the adult children are married and they also give money to their child’s spouse. But what do the kids and their spouses do with that money?

The usual answer is buying new cars more often, remodeling the house, paying for private school for the grandchildren… usually anything but actually investing it. What if the gifts were coordinated in a specific way to make sure that it is invested for the kids’ retirements? What if the investments could be done in a way that provides a tax-free bucket of money for them to draw from so when they reach retirement they won’t just have the typical 100% taxable IRAs and 401K buckets of money to draw from? This taxation problem for the parents is also something that might be mitigated in the second leveraged opportunity.

*The Tax Spread. One of the biggest retirement problems facing my age 60+ clients is a common one, and that is that conventional retirement planning tells us to put away as much money as possible during life in risk-based, tax-deferred accounts and hope for the best. The idea (that rarely works) is that you want to take tax deductions now for putting money into tax-deferred accounts while working so that, when you reach retirement, your income tax rates will be lower. And then conventional tax wisdom is to withdraw as little as possible from these accounts after retirement because every dollar you withdraw is fully income taxable.

For my serious saver clients who follow these pieces of advice, they end up with massive retirement accounts, social security and possibly pension income, and required minimum distributions when they reach 72. Their income tax rates are the same or higher than when they were working. Compounding this problem is that, right now, income tax rates are as low as they have been in decades, and the rates are likely to go up. And then when they pass on large-balance IRAs and 401ks to their children, suddenly the kids are having to withdraw the money on those accounts and pay all of the income taxes on the withdrawals over a ten year period. In other words, those withdrawals get added to their taxable income at their top tax rates, possibly even pushing them into a higher tax bracket.

So what is the solution? Depending on the situation, the advice may be to start withdrawing money as soon as there are no penalties (age 59½) and move the funds into something taxable every year, or even tax-free. What happens if we combine these withdrawals with the gift investment technique we mentioned previously? What if we utilize an estate planning technique of putting those complete gifts into a trust that can protect the investment from lawsuits, divorcing spouses, and Medicaid spenddowns for both the parents and children while being available to the family if needed? Now we are really talking about leveraging the financial power of the family.

*Life Insurance on Ancestors. One of the most effective ways to leverage the first two techniques by planning with the family is to set up the irrevocable trust, place any gifts into the trust, and then have the trustee invest in a specific kind of life insurance on one or both of the parents. Depending on the specifics of the family situation, this often allows the same or better returns than the market provides without the risk of losing money, allows for the trustee (usually one of the adult children) to pull money out for family emergencies on the parents’ behalf, and shelters the policy from lawsuits, divorcing spouses, and Medicaid spenddowns. When the parent insured by the policy dies, there is now a large tax-free bucket of money available to the family that can be distributed to the family according to the terms of the trust.

And here is the bonus/kicker leverage… because this often makes financial sense for the entire family, many times the children pitch in to grow the policy and proceeds exponentially by avoiding the mistake of overfunding their own retirement accounts. Generally speaking, we will advise our clients in planning for retirement to: 1) fund their 401ks only to the point the employer is matching contributions, and do not put any more money in beyond that, 2) pay their taxes and max out contributions to Roth IRAs to the extent possible because this would now be tax-free compounded growth, and then 3) look to other investments that are not tax-qualified. Because the life insurance on a parent often provides a large, non-risked, non-taxable death benefit, it may be the best “investment” option for the children to contribute to.

There is a lot of potential leverage when families take the time to plan together in a coordinated fashion. These three techniques are only the beginning of the discussion, but many of our clients are having this very talk with us and the professionals we work with to save massive amounts in taxes and risk. To learn more about this, please contact our Asset Coordinator Mike Brooks through The Care Assistance Center at 919-518-8237 and ask to speak to him and Jeff about leveraged generational planning. For more information and access to a free webinar, please go to www.linktr.ee/plainenglishattorney and click on the button “Securing Against the SECURE Act and the Five Supervillains of Investing Webinar Materials.”